NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Accounting Policies
Background and Basis of Presentation
Avanos Medical, Inc. is a medical technology company focused on delivering clinically superior breakthrough medical device solutions to improve patients’ quality of life. Headquartered in Alpharetta, Georgia, Avanos is committed to addressing some of today’s most important healthcare needs, such as reducing the use of opioids while helping patients move from surgery to recovery. We develop, manufacture and market clinically superior solutions in more than 90 countries. References herein to “Avanos,” “Company,” “we,” “our” and “us” refer to Avanos Medical, Inc. and its consolidated subsidiaries.
Interim Financial Statements
We prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements, and the condensed consolidated financial statements in this Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021. Our unaudited interim condensed consolidated financial statements contain all necessary material adjustments, which are of a normal and recurring nature, to fairly state our financial condition, results of operations and cash flows for the periods presented.
Use of Estimates
Preparation of our condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting periods. Estimates are used in accounting for, among other things, distributor rebate accruals, future cash flows associated with impairment testing for goodwill and long-lived assets, loss contingencies, and deferred tax assets and potential income tax assessments. Our estimates are subject to uncertainties associated with supply chain disruptions, which have caused volatility and adverse effects in global markets. Actual results could differ from these estimates, and the effect of any change could be material to our financial statements. Changes in these estimates are recorded when known.
Annual Goodwill Impairment Test
We test goodwill for impairment annually or more frequently whenever events or circumstances more likely than not indicate that the fair value of the reporting unit may be below its carrying value. We operate as a single reportable operating segment with one reporting unit. The fair value of our reporting unit was estimated using a combination of income (discounted cash flow analysis) and market approaches. The income approach is dependent upon several assumptions regarding future periods such as sales growth and a terminal growth rate. A weighted average cost of capital (“WACC”) was used to discount future estimated cash flows to their present values. The WACC was based on externally observable data considering market participants’ cost of equity and debt, optimal capital structure and risk factors specific to us. The market approach estimates the value of our company using a market capitalization methodology.
We completed our annual goodwill impairment test as of July 1, 2022, and determined that the fair value of our reporting unit exceeds the net carrying amount. There can be no assurance that the assumptions and estimates made for purposes of the annual goodwill impairment test will prove to be accurate. Volatility in the equity and debt markets, or increases in interest rates, could result in a higher discount rate. Changes in sales volumes, selling prices and costs of goods sold, and increases in interest rates could cause changes in our forecasted cash flows. Unfavorable changes in any of the factors described above could result in a goodwill impairment charge in the future.
Recently Adopted Accounting Pronouncements
Effective January 1, 2022, we adopted Accounting Standards Update (“ASU”) No. 2021-04, Issuers Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This ASU is intended to clarify accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity-classified after modification or exchange. The accounting is determined based on whether the transaction was done to issue equity, issue or modify debt or for other reasons. Adoption of this ASU did not have a material effect on our financial position, results of operations or cash flows.
Recently Issued Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2021-08, Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU pertains to acquired revenue contracts with customers in a business combination and addresses diversity in practice and inconsistency related to recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. This ASU is to be applied prospectively for years beginning after December 15, 2022. Adoption of this ASU is not expected to have a material effect on our financial position, results of operations or cash flows.
Change in Accounting Principle
During the third quarter of 2022, we elected to change our method of accounting for U.S. inventory from the Last-In, First-Out (“LIFO”) method to the First-In, First-Out (“FIFO”) method. We believe the FIFO method of accounting for inventory is preferable because it provides for an inventory balance that more closely reflects the inventory’s current cost, improves efficiency and enhances comparability with our peers. The effects of the change in accounting method from LIFO to FIFO have been retrospectively applied to all periods presented in all sections of this Form 10-Q, including Management's Discussion and Analysis.
As a result of the accounting change, accumulated deficit as of January 1, 2021 improved from $315.5 million, as reported under the LIFO method to $309.9 million using the FIFO method. Accumulated deficit as of January 1, 2022 improved from $310.3 million, as reported under the LIFO method to $303.6 million using the FIFO method.
The following financial statement line items within the accompanying condensed consolidated financial statements and unaudited interim 2022 and 2021 quarterly condensed consolidated financial statements were adjusted as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Condensed Consolidated Income Statements |
(in millions, except per share amounts) | | | | | | | | | | |
(Unaudited) | | | | | | | | | | | |
| Three Months Ended | | Three Months Ended |
| September 30, 2022 | | September 30, 2021 |
| As Calculated (LIFO) | | As Reported (FIFO) | | Effect of Change | | As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Cost of products sold | $ | 92.3 | | | $ | 92.0 | | | $ | (0.3) | | | $ | 93.7 | | | $ | 93.9 | | | $ | 0.2 | |
Income (loss) before income taxes | 15.7 | | | 16.0 | | | 0.3 | | | 2.9 | | | 2.7 | | | (0.2) | |
Income tax (provision) benefit | (0.3) | | | (0.3) | | | — | | | (38.0) | | | (38.0) | | | — | |
Net income (loss) | 15.4 | | | 15.7 | | | 0.3 | | | (35.1) | | | (35.3) | | | (0.2) | |
Earnings (loss) per share: | | | | | | | | | | | |
Basic | $ | 0.33 | | | $ | 0.34 | | | $ | 0.01 | | | $ | (0.73) | | | $ | (0.73) | | | $ | — | |
Diluted | $ | 0.33 | | | $ | 0.33 | | | $ | — | | | $ | (0.73) | | | $ | (0.73) | | | $ | — | |
| | | | | | | | | | | |
| Nine Months Ended | | Nine Months Ended |
| September 30, 2022 | | September 30, 2021 |
| As Calculated (LIFO) | | As Reported (FIFO) | | Effect of Change | | As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Cost of products sold | $ | 270.6 | | | $ | 269.4 | | | $ | (1.2) | | | $ | 283.8 | | | $ | 284.3 | | | $ | 0.5 | |
Income (loss) before income taxes | 40.1 | | | 41.3 | | | 1.2 | | | (18.5) | | | (19.0) | | | (0.5) | |
Income tax (provision) benefit | (7.5) | | | (7.7) | | | (0.2) | | | 13.7 | | | 13.8 | | | 0.1 | |
Net income (loss) | 32.6 | | | 33.6 | | | 1.0 | | | (4.8) | | | (5.2) | | | (0.4) | |
Earnings (loss) per share: | | | | | | | | | | | |
Basic | $ | 0.69 | | | $ | 0.71 | | | $ | 0.02 | | | $ | (0.10) | | | $ | (0.11) | | | $ | (0.01) | |
Diluted | $ | 0.69 | | | $ | 0.71 | | | $ | 0.02 | | | $ | (0.10) | | | $ | (0.11) | | | $ | (0.01) | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Condensed Consolidated Income Statements (cont’d) |
(in millions, except per share amounts) | | | | | | | | | | |
(Unaudited) | | | | | | | | | | | |
| Three Months Ended | | Three Months Ended |
| June 30, 2022 | | June 30, 2021 |
| As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change | | As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Cost of products sold | $ | 88.1 | | | $ | 86.6 | | | $ | (1.5) | | | $ | 100.7 | | | $ | 100.0 | | | $ | (0.7) | |
Income (loss) before income taxes | 16.5 | | | 18.0 | | | 1.5 | | | (8.2) | | | (7.5) | | | 0.7 | |
Income tax (provision) benefit | (5.1) | | | (5.5) | | | (0.4) | | | 46.1 | | | 46.0 | | | (0.1) | |
Net income (loss) | 11.4 | | | 12.5 | | | 1.1 | | | 37.9 | | | 38.5 | | | 0.6 | |
Earnings (loss) per share: | | | | | | | | | | | |
Basic | $ | 0.24 | | | $ | 0.27 | | | $ | 0.03 | | | $ | 0.79 | | | $ | 0.80 | | | $ | 0.01 | |
Diluted | $ | 0.24 | | | $ | 0.26 | | | $ | 0.02 | | | $ | 0.78 | | | $ | 0.79 | | | $ | 0.01 | |
| | | | | | | | | | | |
| Six Months Ended | | Six Months Ended |
| June 30, 2022 | | June 30, 2021 |
| As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change | | As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Cost of products sold | $ | 178.3 | | | $ | 177.4 | | | $ | (0.9) | | | $ | 190.1 | | | $ | 190.4 | | | $ | 0.3 | |
Income (loss) before income taxes | 24.4 | | | 25.3 | | | 0.9 | | | (21.4) | | | (21.7) | | | (0.3) | |
Income tax (provision) benefit | (7.2) | | | (7.4) | | | (0.2) | | | 51.7 | | | 51.8 | | | 0.1 | |
Net income (loss) | 17.2 | | | 17.9 | | | 0.7 | | | 30.3 | | | 30.1 | | | (0.2) | |
Earnings (loss) per share: | | | | | | | | | | | |
Basic | $ | 0.36 | | | $ | 0.38 | | | $ | 0.02 | | | $ | 0.63 | | | $ | 0.63 | | | $ | — | |
Diluted | $ | 0.36 | | | $ | 0.37 | | | $ | 0.01 | | | $ | 0.62 | | | $ | 0.62 | | | $ | — | |
| | | | | | | | | | | |
| Three Months Ended | | Three Months Ended |
| March 31, 2022 | | March 31, 2021 |
| As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change | | As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Cost of products sold | $ | 90.2 | | | $ | 90.8 | | | $ | 0.6 | | | $ | 89.4 | | | $ | 90.4 | | | $ | 1.0 | |
Income (loss) before income taxes | 7.9 | | | 7.3 | | | (0.6) | | | (13.2) | | | (14.2) | | | (1.0) | |
Income tax (provision) benefit | (2.1) | | | (1.9) | | | 0.2 | | | 5.6 | | | 5.8 | | | 0.2 | |
Net income (loss) | 5.8 | | | 5.4 | | | (0.4) | | | (7.6) | | | (8.4) | | | (0.8) | |
Earnings (loss) per share: | | | | | | | | | | | |
Basic | $ | 0.12 | | | $ | 0.11 | | | $ | (0.01) | | | $ | (0.16) | | | $ | (0.17) | | | $ | (0.01) | |
Diluted | $ | 0.12 | | | $ | 0.11 | | | $ | (0.01) | | | $ | (0.16) | | | $ | (0.17) | | | $ | (0.01) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Condensed Consolidated Statements of Comprehensive Income |
(in millions) | | | | | | | | | | |
(Unaudited) | | | | | | | | | | | |
| Three Months Ended | | Three Months Ended |
| September 30, 2022 | | September 30, 2021 |
| As Calculated (LIFO) | | As Reported (FIFO) | | Effect of Change | | As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Net income (loss) | $ | 15.4 | | | 15.7 | | $ | 0.3 | | | $ | (35.1) | | | $ | (35.3) | | | $ | (0.2) | |
Comprehensive income (loss) | 10.3 | | | 10.6 | | 0.3 | | | (38.7) | | | (38.9) | | | (0.2) | |
| | | | | | | | | | | |
| Nine Months Ended | | Nine Months Ended |
| September 30, 2022 | | September 30, 2021 |
| As Calculated (LIFO) | | As Reported (FIFO) | | Effect of Change | | As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Net income (loss) | $ | 32.6 | | | $ | 33.6 | | | $ | 1.0 | | | $ | (4.8) | | | $ | (5.2) | | | $ | (0.4) | |
Comprehensive income (loss) | 23.5 | | | 24.5 | | | 1.0 | | | (10.3) | | | (10.7) | | | (0.4) | |
| | | | | | | | | | | |
| Three Months Ended | | Three Months Ended |
| June 30, 2022 | | June 30, 2021 |
| As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change | | As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Net income (loss) | $ | 11.4 | | | $ | 12.5 | | | $ | 1.1 | | | $ | 37.9 | | | $ | 38.5 | | | $ | 0.6 | |
Comprehensive income (loss) | 5.7 | | | 6.8 | | | 1.1 | | | 40.2 | | | 40.8 | | | 0.6 | |
| | | | | | | | | | | |
| Six Months Ended | | Six Months Ended |
| June 30, 2022 | | June 30, 2021 |
| As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change | | As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Net income (loss) | $ | 17.2 | | | $ | 17.9 | | | $ | 0.7 | | | $ | 30.3 | | | $ | 30.1 | | | $ | (0.2) | |
Comprehensive income (loss) | 13.2 | | | 13.9 | | | 0.7 | | | 28.4 | | | 28.2 | | | (0.2) | |
| | | | | | | | | | | |
| Three Months Ended | | Three Months Ended |
| March 31, 2022 | | March 31, 2021 |
| As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change | | As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Net income (loss) | $ | 5.8 | | | $ | 5.4 | | | $ | (0.4) | | | $ | (7.6) | | | $ | (8.4) | | | $ | (0.8) | |
Comprehensive income (loss) | 7.5 | | | 7.1 | | | (0.4) | | | (11.8) | | | (12.6) | | | (0.8) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Condensed Consolidated Balance Sheets |
(in millions) | | | | | | | | | | |
(Unaudited) | | | | | | | | | | | |
| As of September 30, 2022 | | As of December 31, 2021 |
| As Calculated (LIFO) | | As Reported (FIFO) | | Effect of Change | | As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Inventories | $ | 183.4 | | | $ | 193.6 | | | $ | 10.2 | | | $ | 150.3 | | | $ | 159.3 | | | $ | 9.0 | |
Accrued expenses(a) | 77.5 | | | 80.0 | | | 2.5 | | | 68.1 | | | 68.1 | | | — | |
Deferred tax liabilities | 37.0 | | | 37.0 | | | — | | | 9.6 | | | 11.9 | | | 2.3 | |
Accumulated deficit, end of period | (277.7) | | | (270.0) | | | 7.7 | | | (310.3) | | | (303.6) | | | 6.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Condensed Consolidated Statements of Stockholders’ Equity |
(in millions) | | | | | | | | | | |
(Unaudited) | | | | | | | | | | | |
| Three Months Ended | | Three Months Ended |
| September 30, 2022 | | September 30, 2021 |
| As Calculated (LIFO) | | As Reported (FIFO) | | Effect of Change | | As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Accumulated deficit, beginning of period | $ | (293.1) | | | $ | (285.7) | | | $ | 7.4 | | | $ | (285.2) | | | $ | (279.8) | | | $ | 5.4 | |
Net income (loss) | 15.4 | | | 15.7 | | | 0.3 | | | (35.1) | | | (35.3) | | | (0.2) | |
Total stockholders' equity | 1,255.8 | | | 1,263.5 | | | 7.7 | | | 1,261.9 | | | 1,267.1 | | | 5.2 | |
| | | | | | | | | | | |
| Nine Months Ended | | Nine Months Ended |
| September 30, 2022 | | September 30, 2021 |
| As Calculated (LIFO) | | As Reported (FIFO) | | Effect of Change | | As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Accumulated deficit, beginning of period | $ | (310.3) | | | $ | (303.6) | | | $ | 6.7 | | | $ | (315.5) | | | $ | (309.9) | | | $ | 5.6 | |
Net income (loss) | 32.6 | | | 33.6 | | | 1.0 | | | (4.8) | | | (5.2) | | | (0.4) | |
Total stockholders' equity | 1,255.8 | | | 1,263.5 | | | 7.7 | | | 1,261.9 | | | 1,267.1 | | | 5.2 | |
| | | | | | | | | | | |
| Three Months Ended | | Three Months Ended |
| June 30, 2022 | | June 30, 2021 |
| As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change | | As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Accumulated deficit, beginning of period | $ | (304.5) | | | $ | (298.2) | | | $ | 6.3 | | | $ | (323.1) | | | $ | (318.3) | | | $ | 4.8 | |
Net income (loss) | 11.4 | | | 12.5 | | | 1.1 | | | 37.9 | | | 38.5 | | | 0.6 | |
Total stockholders' equity | 1,251.6 | | | 1,259.0 | | | 7.4 | | | 1,296.3 | | | 1,301.7 | | | 5.4 | |
| | | | | | | | | | | |
| Six Months Ended | | Six Months Ended |
| June 30, 2022 | | June 30, 2021 |
| As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change | | As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Accumulated deficit, beginning of period | $ | (310.3) | | | $ | (303.6) | | | $ | 6.7 | | | $ | (315.5) | | | $ | (309.9) | | | $ | 5.6 | |
Net income (loss) | 17.2 | | | 17.9 | | | 0.7 | | | 30.3 | | | 30.1 | | | (0.2) | |
Total stockholders' equity | 1,251.6 | | | 1,259.0 | | | 7.4 | | | 1,296.3 | | | 1,301.7 | | | 5.4 | |
| | | | | | | | | | | |
| Three Months Ended | | Three Months Ended |
| March 31, 2022 | | March 31, 2021 |
| As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change | | As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Accumulated deficit, beginning of period | $ | (310.3) | | | $ | (303.6) | | | $ | 6.7 | | | $ | (315.5) | | | $ | (309.9) | | | $ | 5.6 | |
Net income (loss) | 5.8 | | | 5.4 | | | (0.4) | | | (7.6) | | | (8.4) | | | (0.8) | |
Total stockholders' equity | 1,256.5 | | | 1,262.8 | | | 6.3 | | | 1,252.6 | | | 1,257.4 | | | 4.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Condensed Consolidated Cash Flow Statements |
(in millions) | | | | | | | | | | | |
(Unaudited) | | | | | | | | | | | |
| Nine Months Ended | | Nine Months Ended |
| September 30, 2022 | | September 30, 2021 |
| As Calculated (LIFO) | | As Reported (FIFO) | | Effect of Change | | As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Net income (loss) | $ | 32.6 | | | $ | 33.6 | | | $ | 1.0 | | | $ | (4.8) | | | $ | (5.2) | | | $ | (0.4) | |
Inventories | (34.6) | | | (35.8) | | | (1.2) | | | 9.4 | | | 9.9 | | | 0.5 | |
Accrued expenses(a) | (18.7) | | | (18.5) | | | 0.2 | | | (24.4) | | | (24.5) | | | (0.1) | |
| | | | | | | | | | | |
| Six Months Ended | | Six Months Ended |
| June 30, 2022 | | June 30, 2021 |
| As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change | | As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Net income (loss) | $ | 17.2 | | | $ | 17.9 | | | $ | 0.7 | | | $ | 30.3 | | | $ | 30.1 | | | $ | (0.2) | |
Inventories | (17.1) | | | (18.0) | | | (0.9) | | | 8.7 | | | 9.0 | | | 0.3 | |
Accrued expenses(a) | (28.7) | | | (28.5) | | | 0.2 | | | (5.6) | | | (5.7) | | | (0.1) | |
| | | | | | | | | | | |
| Three Months Ended | | Three Months Ended |
| March 31, 2022 | | March 31, 2021 |
| As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change | | As Reported (LIFO) | | As Adjusted (FIFO) | | Effect of Change |
Net income (loss) | $ | 5.8 | | | $ | 5.4 | | | $ | (0.4) | | | $ | (7.6) | | | $ | (8.4) | | | $ | (0.8) | |
Inventories | (4.5) | | | (3.9) | | | 0.6 | | | 2.8 | | | 3.8 | | | 1.0 | |
Accrued expenses(a) | (28.6) | | | (28.8) | | | (0.2) | | | (2.0) | | | (2.2) | | | (0.2) | |
__________________________________________________
(a)We have elected to apply FASB Interpretation 18 (FIN 18) to the income tax effects arising from the change in accounting principle for interim reporting periods. As a result, we have presented the tax effects from the change in accounting principle in Accrued income taxes payable within Accrued expenses on the Condensed Consolidated Balance Sheets for the interim reporting periods disclosed in the tables above. For annual reporting periods, tax effects from the change in accounting principle are reflected in Deferred tax liabilities on the Condensed Consolidated Balance Sheets.
Note 2. Business Acquisition
On January 20, 2022, we acquired all of the equity voting interests and completed the acquisition of OrthogenRx, Inc. (“OrthogenRx”), which is focused on the development and commercialization of treatments for knee pain caused by osteoarthritis. We expect the acquisition of OrthogenRx will enhance our chronic pain portfolio. The initial purchase price was $130 million at closing less working capital adjustments, with up to an additional $30 million payable in contingent cash consideration based on OrthogenRx’s growth in net sales during 2022 and 2023. The purchase price was funded by available cash on hand and the proceeds of borrowings, including an incremental $125.0 million tranche of term loans. The accompanying condensed consolidated income statement for the three and nine months ended September 30, 2022 includes $20.4 million and $56.9 million of net sales, respectively, from OrthogenRx since the closing of the acquisition. In the three and nine months ended September 30, 2022, we incurred $0.2 million and $1.6 million of costs, respectively, in connection with the OrthogenRx acquisition, which are included in “Selling and general expenses.”
We accounted for the OrthogenRx acquisition under the acquisition method of accounting for business combinations. Accordingly, the purchase price paid was allocated to the underlying net assets in proportion to their respective fair values. The fair value of the net assets acquired are based on estimates and assumptions relating to certain intangible assets acquired, liabilities assumed, income taxes and loss contingencies, which are subject to change during the measurement period (up to one year from the acquisition date). The deferred tax liability is subject to change as the estimated liability may be adjusted in conjunction with our year-end tax provision calculation. Any excess of the purchase price over the estimated fair values was recorded as goodwill. Fair values of assets acquired and liabilities assumed were determined using discounted cash flow analyses, and the fair value of the contingent cash consideration was estimated using a Monte Carlo simulation. The purchase price allocation, net of cash acquired, is shown in the table below (in millions):
| | | | | |
Accounts receivable, net | $ | 13.7 | |
Inventory | 2.8 | |
Other current assets | 0.4 | |
Accounts payable | (5.4) | |
Other current liabilities | (13.0) | |
Contingent consideration | (9.2) | |
Other non-current assets (liabilities) | (9.5) | |
Deferred tax liability | (23.7) | |
Identifiable intangible assets | 135.6 | |
Goodwill | 24.4 | |
Total | $ | 116.1 | |
Goodwill arising from the OrthogenRx acquisition is not fully tax deductible. The identifiable intangible assets relating to the OrthogenRx acquisition include the following (in millions, except years):
| | | | | | | | |
| Identifiable Intangible Asset Amount | Weighted Average Useful Lives (Years) |
Trademarks | $ | 1.3 | | 10 |
Other | 134.3 | | 14 |
Total | $ | 135.6 | | |
Other intangible assets are primarily related to the OrthogenRx products that we currently market and distribute, combined into one composite intangible asset that includes customer relationships and exclusive distribution rights.
The following unaudited pro forma financial information is presented in the table below for the three and nine months ended September 30, 2022 and 2021 as if the acquisition had occurred on January 1, 2021 (in millions, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 (Unaudited) | | 2021 (Unaudited) | | 2022 (Unaudited) | | 2021 (Unaudited) |
Net sales | $ | 202.1 | | | $ | 204.3 | | | $ | 604.8 | | | $ | 605.5 | |
| | | | | | | |
Net income | $ | 15.9 | | | $ | (28.2) | | | $ | 36.7 | | | $ | 9.8 | |
| | | | | | | |
Earnings (Loss) Per Share: | | | | | | | |
Basic | $ | 0.34 | | | $ | (0.58) | | | $ | 0.78 | | | $ | 0.20 | |
Diluted | $ | 0.34 | | | $ | (0.58) | | | $ | 0.77 | | | $ | 0.20 | |
The pro forma financial information has been adjusted to include the effects of the acquisition, including acquisition-related costs, amortization of acquired intangibles and related tax effects. The pro-forma financial information is not necessarily indicative of the results of operations that would have been achieved.
Note 3. Supplemental Balance Sheet Information
Accounts Receivable
Accounts receivable consist of the following (in millions): | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Accounts receivable | $ | 140.0 | | | $ | 122.0 | |
Income tax receivable | 12.2 | | | 13.0 | |
Allowances and doubtful accounts: | | | |
Doubtful accounts | (5.7) | | | (3.6) | |
Sales discounts | (0.3) | | | (0.2) | |
Accounts receivable, net | $ | 146.2 | | | $ | 131.2 | |
Losses on receivables are estimated based on known troubled accounts and historical experience. Receivables are considered impaired and written off when it is probable that payments due will not be collected. Our provision for doubtful accounts was a net expense of $0.4 million and $1.0 million for the three and nine months ended September 30, 2022, respectively, compared to a net benefit of $0.1 million and $0.5 million for the three and nine months ended September 30, 2021, respectively.
Inventories
Inventories at the lower of cost (determined on the FIFO method) or net realizable value consists of the following (in millions): | | | | | | | | | | | | | | | |
| September 30, 2022 | | | | | | December 31, 2021 |
Raw materials | $ | 55.3 | | | | | | | $ | 47.7 | |
Work in process | 34.1 | | | | | | | 33.2 | |
Finished goods | 96.7 | | | | | | | 71.6 | |
Supplies and other | 7.5 | | | | | | | 6.8 | |
Total Inventory | $ | 193.6 | | | | | | | $ | 159.3 | |
As of September 30, 2022, our inventory reserve balance was $5.0 million consisting of $2.2 million for Halyard-branded inventory and $2.8 million for inventory obsolescence.
Property, Plant and Equipment
Property, plant and equipment consists of the following (in millions): | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Land | $ | 1.1 | | | $ | 1.1 | |
Buildings and leasehold improvements | 47.0 | | | 48.0 | |
Machinery and equipment | 230.1 | | | 223.2 | |
Construction in progress | 34.4 | | | 32.0 | |
| 312.6 | | | 304.3 | |
Less accumulated depreciation | (149.2) | | | (136.2) | |
Total | $ | 163.4 | | | $ | 168.1 | |
Depreciation expense was $5.5 million and $16.3 million for the three and nine months ended September 30, 2022, respectively, compared to $5.4 million and $16.3 million for the three and nine months ended September 30, 2021, respectively.
Goodwill and Intangible Assets
The changes in the carrying amount of goodwill are as follows (in millions): | | | | | |
| Goodwill |
Balance, December 31, 2021 | $ | 801.6 | |
Goodwill acquired (a) | 24.4 | |
Currency translation adjustment | (2.4) | |
Balance, September 30, 2022 | $ | 823.6 | |
____________________________________________
(a)We acquired $24.4 million of goodwill in conjunction with the acquisition of OrthogenRx described in Note 2, “Business Acquisition.” Goodwill was allocated to our existing medical devices reporting segment.
Intangible assets subject to amortization consist of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Trademarks | $ | 92.5 | | | $ | (66.2) | | | $ | 26.3 | | | $ | 90.9 | | | $ | (64.0) | | | $ | 26.9 | |
Patents and acquired technologies | 278.8 | | | (192.1) | | | 86.7 | | | 271.7 | | | (177.7) | | | 94.0 | |
Other | 187.4 | | | (41.7) | | | 145.7 | | | 61.2 | | | (40.9) | | | 20.3 | |
Total | $ | 558.7 | | | $ | (300.0) | | | $ | 258.7 | | | $ | 423.8 | | | $ | (282.6) | | | $ | 141.2 | |
In the first quarter of 2022, we acquired $135.6 million of identified intangibles in conjunction with our acquisition of OrthogenRx, as described in Note 2, “Business Acquisition.” Amortization expense for intangible assets is included in “Costs of products sold” and “Selling and general expenses” and was $6.1 million and $18.0 million for the three and nine months ended September 30, 2022, respectively, compared to $4.2 million and $12.5 million for the three and nine months ended September 30, 2021, respectively.
Amortization expense for the remainder of 2022 and the following four years and thereafter is estimated as follows (in millions):
| | | | | | | | |
| | Amount |
Remainder of 2022 | | $ | 12.4 | |
2023 | | 29.9 | |
2024 | | 29.9 | |
2025 | | 29.3 | |
2026 | | 22.7 | |
Thereafter | | 134.5 | |
Total | | $ | 258.7 | |
Accrued Expenses
Accrued expenses consist of the following (in millions): | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Accrued rebates and customer incentives | $ | 23.6 | | | $ | 24.5 | |
Accrued salaries and wages | 33.4 | | | 29.3 | |
Accrued taxes and other | 9.5 | | | 3.0 | |
Other | 13.5 | | | 11.3 | |
Total | $ | 80.0 | | | $ | 68.1 | |
Other Long-Term Liabilities
Other long-term liabilities consist of the following (in millions): | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| | | |
Accrued compensation and benefits | $ | 4.3 | | | $ | 4.4 | |
Other (a) | 23.5 | | | 4.7 | |
Total | $ | 27.8 | | | $ | 9.1 | |
__________________________________________________
(a)For the September 30, 2022 period presented, amounts primarily relate to contingent consideration and indemnification liability associated with the OrthogenRx acquisition as described in Note 2, “Business Acquisition.”
Note 4. Fair Value Information
The following fair value information is based on a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels in the hierarchy used to measure fair value are:
Level 1: Unadjusted quoted prices in active markets accessible at the reporting date for identical assets and liabilities.
Level 2: Quoted prices for similar assets or liabilities in active markets. Quoted prices for identical or similar assets and liabilities in markets that are not considered active or financial instruments for which all significant inputs are observable, either directly or indirectly.
Level 3: Prices or valuations that require inputs that are significant to the valuation and are unobservable.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The following table includes the fair value of our financial instruments for which disclosure of fair value is required (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2022 | | December 31, 2021 |
| Fair Value Hierarchy Level | | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
Assets | | | | | | | | | |
Cash and cash equivalents | 1 | | $ | 117.0 | | | $ | 117.0 | | | $ | 118.5 | | | $ | 118.5 | |
Liabilities | | | | | | | | | |
Revolving Credit Facility | 2 | | $ | 130.0 | | | $ | 130.0 | | | $ | 130.0 | | | $ | 130.0 | |
Term Loan Facility | 2 | | 124.0 | | | 124.0 | | | — | | | — | |
Contingent consideration related to acquisition | 3 | | 9.2 | | | 9.2 | | | — | | | — | |
Cash equivalents are recorded at cost, which approximates fair value due to their short-term nature. The fair value of amounts borrowed under our Revolving Credit Facility and Term Loan Facility approximates carrying value because borrowings are subject to a variable rate as described in Note 5, “Debt.” The fair value amount of the contingent consideration was determined using a Monte Carlo simulation using assumptions regarding net sales volatility, discount rate and others. See further discussion of the acquisition of OrthogenRx in Note 2, “Business Acquisition.”
Note 5. Debt
As of September 30, 2022 and December 31, 2021, our respective debt balances were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted-Average Interest Rate | | Maturity | | September 30, 2022 | | December 31, 2021 (a) |
Revolving Credit Facility | 4.18 | % | | 2027 | | $ | 130.0 | | | $ | 130.0 | |
Term Loan Facility | 4.18 | % | | 2027 | | 125.0 | | | — | |
| | | | | 255.0 | | | 130.0 | |
Unamortized debt issuance costs | | | | | (1.0) | | | — | |
Current portion of long-term debt | | | | | (6.2) | | | — | |
Total Long-Term Debt, net | | | | | $ | 247.8 | | | $ | 130.0 | |
____________________________________________
(a)Borrowings for this period presented were under the Amended and Restated Credit Agreement dated as of October 30, 2018.
On June 24, 2022, we entered into a credit agreement (the “Credit Agreement”) with certain lenders which established credit facilities in an aggregate principal amount of $500.0 million, consisting of a five-year senior secured term loan of $125.0 million (the “Term Loan Facility”) and a five-year senior secured revolving credit facility allowing borrowings of up to $375.0 million, with a letter of credit subfacility in an amount of $75.0 million (the “Revolving Credit Facility”). All obligations under the Credit Agreement and certain hedging agreements and cash management arrangements thereunder are: (i) guaranteed by each of the Company’s direct and indirect, existing and future, material wholly owned domestic subsidiaries (“Guarantors”) and (ii) secured by a first priority lien on substantially all the assets of the Company and the Guarantors. The Credit Agreement contains an accordion feature that allows us to incur incremental term loans under the Term Loan Facility or under new term loan facilities or to increase the amount of the commitments under the Revolving Credit Facility, including through the establishment of one or more tranches under the Revolving Credit Facility. The Credit Agreement will mature on June 24, 2027.
Borrowings under the Term Loan Facility and Revolving Credit Facility bear interest at our option at either: (i) an adjusted term secured overnight financing rate (“SOFR”), plus a margin ranging between 1.50% to 2.00% per annum, depending on our consolidated total leverage ratio; (ii) an adjusted daily simple SOFR rate, plus a margin ranging between 1.50% to 2.00% per annum, depending on our consolidated total leverage ratio; or (iii) a base rate (calculated as the greatest of (a) the prime rate, (b) the NYFRB rate (being the greater of the federal funds effective rate or the overnight bank funding rate) plus 0.50%, and (c) the one month adjusted term SOFR rate plus 1.00%), plus a margin ranging between 0.50% to 1.00% per annum, depending on our consolidated total leverage ratio. The unused portion of the Revolving Credit Facility will be subject to a commitment fee ranging between 0.20% to 0.25% per annum, depending on our consolidated total leverage ratio. Unamortized debt discount
and issuance costs are being amortized to interest expense over the life of the Term Loan Facility using the interest method, resulting in an effective interest rate of 4.4% as of September 30, 2022.
The Credit Agreement requires compliance with certain customary operational and financial covenants. As of September 30, 2022, we were in compliance with these covenants. In addition, the Credit Agreement contains certain other customary limitations on our ability to, among other things: incur additional indebtedness; pay dividends on or repurchase or redeem our capital stock; make loans, investments and acquisitions; sell, transfer or otherwise dispose of assets; guarantee other obligations; create or grant liens; and enter into certain types of transactions with affiliates. Notwithstanding such limitations, the Credit Agreement allows us to pay dividends, repurchase stock and make investments up to an “Available Amount,” as defined in the Credit Agreement, provided no event of default has occurred and certain financial ratios have been achieved on a pro forma basis. We are permitted to prepay all or a portion of the Term Loan Facility and the Revolving Credit Facility at any time without premium or penalty. As of September 30, 2022, we had $130.0 million of borrowings under the Revolving Credit Facility.
In connection with entering into the Credit Agreement, we terminated the Amended and Restated Credit Agreement dated as of October 30, 2018 by and among the Company, the lenders thereunder and Citibank N.A., as administrative agent (as amended and supplemented, the “Prior Credit Agreement”). The Prior Credit Agreement established a $250.0 million senior secured revolving credit facility, with a letter of credit sub-facility of $25.0 million. The Prior Credit Agreement was scheduled to mature on October 30, 2023. As a result of terminating the Prior Credit Agreement, for the nine months ended September 30, 2022, we incurred a debt extinguishment loss of $1.1 million, which is included in “Interest expense” in the accompanying consolidated income statement.
Debt Payments
The Credit Agreement requires quarterly principal installment payments on the Term Loan Facility of 10 percent of the total principal borrowed for the first eight quarters following funding and then quarterly installment payments of 20 percent of the total principal borrowed, at which time the remaining unpaid principal amount of the Term Loan Facility is due and payable by the Company upon the maturity date of June 24, 2027. The current portion of the Term Loan Facility is $6.2 million. Interest is payable quarterly. We have the right to voluntarily prepay the Term Loan Facility in accordance with the terms of the Credit Agreement. Interest is payable at the same rates set forth above for the Revolving Credit Facility
As of September 30, 2022, the aggregate amounts of long-term debt that will mature during each of the next four years and thereafter are as follows (in millions):
| | | | | | | | |
| | Amount |
Remainder of 2022 | | $ | 1.6 | |
2023 | | 6.2 | |
2024 | | 7.0 | |
2025 | | 9.4 | |
2026 | | 10.2 | |
Thereafter | | 220.6 | |
Total | | $ | 255.0 | |
Note 6. Accumulated Other Comprehensive Income
The changes in the components of Accumulated Other Comprehensive Income (“AOCI”), net of tax, are as follows (in millions):
| | | | | | | | | | | | | | | |
| Unrealized Currency Translation | | | | | | Accumulated Other Comprehensive Loss |
Balance, December 31, 2021 | $ | (33.8) | | | | | | | $ | (33.8) | |
Other comprehensive income (loss) | (9.1) | | | | | | | (9.1) | |
Balance, September 30, 2022 | $ | (42.9) | | | | | | | $ | (42.9) | |
The net changes in the components of AOCI, including the tax effect, are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Unrealized currency translation | $ | (5.1) | | | $ | (3.7) | | | $ | (9.1) | | | $ | (5.6) | |
Defined benefit pension plans | — | | | 0.1 | | | — | | | 0.1 | |
| | | | | | | |
Defined benefit pension plans, net of tax | — | | | 0.1 | | | — | | | 0.1 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Change in AOCI | $ | (5.1) | | | $ | (3.6) | | | $ | (9.1) | | | $ | (5.5) | |
Note 7. Stock-Based Compensation
Stock-based compensation expense is included in “Cost of products sold,” “Research and development,” and “Sales and general expenses.” Stock-based compensation expense for the three and nine months ended September 30, 2022 and 2021 is shown in the table below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Stock options | $ | 0.3 | | | $ | 0.4 | | | $ | 0.9 | | | $ | 1.5 | |
Time-based restricted share units | 3.1 | | | 2.5 | | | 8.6 | | | 6.8 | |
Performance-based restricted share units | 0.7 | | | 0.5 | | | 2.2 | | | 1.7 | |
Employee stock purchase plan | — | | | 0.1 | | | 0.2 | | | 0.2 | |
Total stock-based compensation | $ | 4.1 | | | $ | 3.5 | | | $ | 11.9 | | | $ | 10.2 | |
Note 8. Commitments and Contingencies
Legal Matters
We are subject to various legal proceedings, claims and governmental inspections, audits or investigations pertaining to issues such as contract disputes, product liability, tax matters, patents and trademarks, advertising, governmental regulations, employment and other matters. Under the terms of the distribution agreement we entered into with Kimberly-Clark Corporation (“Kimberly-Clark”) prior to our 2014 spin-off from Kimberly-Clark, legal proceedings, claims and other liabilities that are primarily related to our business are our responsibility and we are obligated to indemnify and hold Kimberly-Clark harmless for such matters.
Government Investigation
In June 2015, we were served with a subpoena from the Department of Veterans Affairs Office of the Inspector General (“VA OIG”) seeking information related to the design, manufacture, testing, sale and promotion of MicroCool and other surgical gowns produced by the Company. In July 2015, we became aware that the VA OIG subpoena and an earlier VA OIG subpoena served on Kimberly-Clark requesting information about gown sales to the federal government were related to a United States Department of Justice (“DOJ”) investigation. In May 2016, April 2017 and September 2018, we received additional subpoenas from the DOJ seeking further information related to the Company’s surgical gowns.
On July 6, 2021, we entered into a Deferred Prosecution Agreement (“DPA”) with the DOJ that resolved their criminal investigation related to our MicroCool surgical gowns. Pursuant to the terms of the DPA, in July 2021 the Company made a payment of $22.2 million. We continue to comply with the terms of the DPA.
Patent Litigation
We operate in an industry characterized by extensive patent litigation. Competitors may claim that our products infringe upon their intellectual property. Resolution of patent litigation or other intellectual property claims is typically time consuming and costly and can result in significant damage awards and injunctions that could prevent the manufacture and sale of the affected products or require us to make significant royalty payments in order to continue selling the affected products.
At any given time, we may be involved as either a plaintiff or a defendant in a number of patent infringement actions, the outcomes of which may not be known for prolonged periods of time.
General
While we maintain general and professional liability, product liability and other insurance, our insurance policies may not cover all of these matters and may not fully cover liabilities arising out of these matters. In addition, we may be obligated to indemnify our directors and officers against these matters.
We record provisions in the consolidated financial statements for pending litigation when we determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. For any matters that are reasonably possible to result in loss and for which no possible loss or range of loss is disclosed in this Form 10-Q, management has determined that it is unable to estimate the possible loss or range of loss because, in each case, at least the following facts applied: (a) the matter is at an early stage of the proceedings; (b) the damages are indeterminate, unspecified or determined to be immaterial; and (c) significant factual issues have yet to be resolved. At present, although the results of litigation and claims cannot be predicted with certainty, we believe that the ultimate resolution of any pending legal proceeding to which we are a party will not have a material adverse effect on our business, financial condition, results of operations or liquidity.
Environmental Compliance
We are subject to federal, state and local environmental protection laws and regulations with respect to our business operations. We believe we are operating in compliance with, or are taking action aimed at ensuring compliance with, these laws and regulations. None of our compliance obligations with environmental protection laws and regulations, individually or in the aggregate, is expected to have a material adverse effect on our business, financial condition, results of operations or liquidity.
Note 9. Earnings Per Share (“EPS”)
Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during each period. Diluted earnings per share is calculated by dividing net income by the number of common shares outstanding and the effect of all dilutive common stock equivalents outstanding during each period, as determined using the treasury stock method.
The calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2022 and 2021 is set forth in the following table (in millions, except per share amounts): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) | $ | 15.7 | | | $ | (35.3) | | | $ | 33.6 | | | $ | (5.2) | |
| | | | | | | |
Weighted Average Shares Outstanding: | | | | | | | |
Basic weighted average shares outstanding | 46.6 | | | 48.1 | | | 47.1 | | | 48.1 | |
Dilutive effect of stock options and restricted share unit awards | 0.4 | | | — | | | 0.4 | | | — | |
Diluted weighted average shares outstanding | 47.0 | | | 48.1 | | | 47.5 | | | 48.1 | |
Earnings (Loss) Per Share | | | | | | | |
Basic | $ | 0.34 | | | $ | (0.73) | | | $ | 0.71 | | | $ | (0.11) | |
Diluted | $ | 0.33 | | | $ | (0.73) | | | $ | 0.71 | | | $ | (0.11) | |
Restricted share units (“RSUs”) contain provisions allowing for the equivalent of any dividends paid on common stock during the restricted period to be reinvested into additional RSUs at the then fair market value of the common stock on the date the dividends are paid. Such awards are to be included in the EPS calculation under the two-class method. Currently, we do not anticipate any cash dividends for the foreseeable future and our outstanding RSU awards are not material in comparison to our weighted average shares outstanding. Accordingly, all EPS amounts reflect shares as if they were fully vested and the disclosures associated with the two-class method are not presented herein.
For the three and nine months ended September 30, 2022, 1.7 million and 1.8 million of potentially dilutive stock options and RSU awards were excluded from the computation of earnings per share as their effect would have been anti-dilutive.
Note 10. Business and Products Information
We conduct our business in one operating and reportable segment that provides our medical device products to healthcare providers and patients in more than 90 countries with manufacturing facilities in the United States and Mexico.
We provide a portfolio of innovative product offerings focused on chronic care and pain management to improve patient outcomes and reduce the cost of care. Our management evaluates net sales by product category within our single reportable segment as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Chronic Care: | | | | | | | |
Digestive health | $ | 85.9 | | | $ | 77.8 | | | $ | 247.5 | | | $ | 235.3 | |
Respiratory health | 29.8 | | | 39.3 | | | 100.0 | | | 118.9 | |
Total Chronic Care | 115.7 | | | 117.1 | | | 347.5 | | | 354.2 | |
Pain Management: | | | | | | | |
Acute pain | $ | 38.9 | | | $ | 40.7 | | | $ | 118.8 | | | $ | 121.6 | |
Interventional pain | 47.5 | | | 26.3 | | | 136.2 | | | 75.4 | |
Total Pain Management | 86.4 | | | 67.0 | | | 255.0 | | | 197.0 | |
Total Net Sales | $ | 202.1 | | | $ | 184.1 | | | $ | 602.5 | | | $ | 551.2 | |
Chronic care is a portfolio of products including:
•Digestive health products such as our Mic-Key enteral feeding tubes, Corpak patient feeding solutions and NeoMed neonatal and pediatric feeding solutions; and
•Respiratory health products such as our closed airway suction systems and other airway management devices marketed under the Ballard, Microcuff and Endoclear brands.
Pain management is a portfolio of non-opioid pain solutions including:
•Acute pain products such as On-Q and ambIT surgical pain pumps and Game Ready cold and compression therapy systems; and
•Interventional pain solutions, which provide minimally invasive pain relief therapies, such as our Coolief pain therapy and OrthogenRx’s pain relief injection products.
Liabilities for estimated returns, rebates and incentives are presented in the table below (in millions):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Accrued rebates | $ | 12.3 | | | $ | 14.3 | |
Accrued customer incentives | 11.3 | | | 10.2 | |
Accrued rebates and customer incentives | 23.6 | | | 24.5 | |
Accrued sales returns(a) | 0.1 | | | 0.1 | |
Total estimated liabilities | $ | 23.7 | | | $ | 24.6 | |
__________________________________________________
(a)Accrued sales returns are included in “Other” in the accrued expenses table in Note 3, “Supplemental Balance Sheet Information.”
Due to the nature of our business, we receive purchase orders for products under supply agreements which are normally fulfilled within three to four weeks. Our performance obligations under purchase orders are satisfied and revenue is recognized at a point in time, which is upon shipment or upon delivery of our products, depending on shipping terms. Accordingly, we normally do not have transactions that give rise to material unfulfilled performance obligations.
Note 11. Share Repurchase Programs
On December 15, 2021, we announced that our Board of Directors had approved a share repurchase program authorizing us to repurchase up to $30.0 million of our common stock. We established a pre-arranged trading plan in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Rule 10b5-1 trading plan permits common stock to be repurchased over a twelve-month period. In the fourth quarter of 2021, we repurchased $10.7 million of our common stock and during the first quarter of 2022, we repurchased an additional $19.3 million of our common stock.
On May 16, 2022, the Board of Directors approved a new one-year program under which we may repurchase up to $25.0 million of our common stock. Repurchases under this program will be made from time to time at management’s discretion on the open market or through privately negotiated transactions in compliance with Rule 10b-18 under the Exchange Act, subject to market conditions, applicable legal requirements and other relevant factors, and we have established a pre-arranged trading plan under Rule 10b5-1 of the Exchange Act. This share repurchase program does not obligate us to purchase any particular amount of common stock and may be suspended, modified or discontinued by us without prior notice.
For the nine months ended September 30, 2022, our repurchases of our common stock were as summarized in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shares Repurchased | | Aggregate Purchase Price (in millions) | | Average Price per Share | | Amount Remaining in Program for Purchase (in millions) |
| | # of Shares | | Program to Date | | | |
First quarter of 2022 | | 588,293 | | | 911,433 | | | $ | 19.3 | | | $ | 32.85 | | | $ | — | |
Second quarter of 2022 | | 522,162 | | | 522,162 | | | 14.1 | | | 27.00 | | | 10.9 | |
Third quarter of 2022 | | 399,957 | | | 922,119 | | | 10.9 | | | 27.25 | | | — | |
In addition to the share repurchase program, we withheld 27,263 shares of common stock for $0.8 million in taxes associated with stock-based compensation transactions for the nine months ended September 30, 2022.